Financial Decision Making When Buying and Owning a Home

40 Pages Posted: 21 Sep 2014

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Crocker Herbert Liu

Cornell University - School of Hotel Administration

Walter N. Torous

Massachusetts Institute of Technology

Vincent Yao

Georgia State University - J. Mack Robinson College of Business

Date Written: September 18, 2014

Abstract

In this paper we investigate if financially sophisticated households, as measured by schooling and work experience, are less likely to make financial mistakes when buying and owning a home. Surprisingly, we find that financial sophistication does not have a uniform impact across households’ financial decisions. While sophisticated households are less likely to pay too high a mortgage rate and more likely to refinance when it is financially advantageous to do so, they are also more likely to over pay for a house and less likely to default when significantly underwater in their mortgages. We argue that some decisions, like purchasing a home or defaulting on a mortgage, are emotional decisions while others, like deciding on mortgage terms or when to refinance, are analytical decisions more amenable to the analyses that sophisticated households are able engage in. Consistent with this, we provide evidence that households learn over time to make better mortgage rate and refinancing decisions but not better house purchase price decisions.

Keywords: Household Finance, Mortgages, Refinance, Option Value, Financial Crisis

JEL Classification: D12, D14, G11, G21

Suggested Citation

Agarwal, Sumit and Liu, Crocker Herbert and Torous, Walter N. and Yao, Vincent, Financial Decision Making When Buying and Owning a Home (September 18, 2014). Available at SSRN: https://ssrn.com/abstract=2498111 or http://dx.doi.org/10.2139/ssrn.2498111

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Crocker Herbert Liu

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

Walter N. Torous

Massachusetts Institute of Technology ( email )

Center for Real Estate and Sloan School
Cambridge, MA 02138
United States

Vincent Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
181
Abstract Views
1,142
rank
167,836
PlumX Metrics